GBP to EUR: Exchange Rate Awaits Fireworks

The British pound has pared recent gains against the euro as currency markets cut back on exposure to the pair ahead of a crucial ECB rate decision on Thursday.

Early December promises great opportunity for those positioned either side of the pound / euro conversion as the European Central Bank (ECB) is widely expected to lower interest rates and expand their quantitative easing programme on December the 3rd.

Ahead of the event we are seeing sterling fall back to 1.42 as markets cut back on exposure to the pair following days of gains.

However we see major issues arising from the confidence markets have placed in the ECB to deliver something spectacular - the euro has been sold on such assumptions and disappointments will see panic buying unfold.

Those looking for a higher euro from which to conduct their international payments will therefore be hoping the ECB underwhelms on the aggression of the announced easing.

Such a move will be welcomed by euro-sellers as a study of the yearly charts confirms the euro is at its lowest levels against the pound sterling since 2006.

A pipeline of ECB communication ahead of the Thursday event has delivered regular news for markets to digest and sell the euro further.  Recently, and under conditions of anonymity, an ECB official indicated that options for December’s ECB rate decision meeting are still being debated.

One official was quoted as saying the ECB "are still trying to figure out what will be in the package. A lot of people have different views."

One such option would include introducing two-tiered deposit rates and buying re-bundled loans on non-performing loans.

The purchase of debt issued by towns and regional administrations is even said to be up for grabs. 

Latest Pound/Euro Exchange Rates

	Live: 1.1459▲ + 0.14% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1069 - 1.1115
**Independent Specialist	1.1299 - 1.1344 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

All this news has primed markets for the possibility of a surprise move by ECB President Draghi.

The question for those looking for a higher pound to euro exchange rate is how much of a surprise has already been written into the current level of 1.4193?

If a move, such as a two-tier bank charge, is announced will the exchange rate conversion just hover around recent levels because the news was expected anyway?

We think this would indeed be the reaction and coming in on expectation would likely boost the euro.

Draghi is therefore under immense pressure to over-deliver or the euro exchange rate complex and Eurozone bond yields will run sharply higher in relief. This is exactly the scenario the central bank wants to avoid as it will ensure Eurozone exports become more expensive on the global stage and the cost of lending money rises.  

All this will hamper the benign economic growth seen in the Eurozone.

The ECB therefore needs to deliver an aggressive step-up in their policy of easing or markets will reverse the recent trend of selling euros.

Hence, we are expecting the unexpected and forecast the British pound to advance against the euro.

But, Peter Rosenstreich at Swissquote Bank, in Gland Switzerland, hints at an underwhelming response:

“The easing options for the ECB are extensive but we think a more vanilla policy mixed would be more effective and the likely direction. Draghi is likely to withhold more exotic easing measures in the event that inflation and growth projections move downwards again.”

Rosenstreich does nevertheless believe Draghi and his team will go big with a full suite of policy actions.

The main deposit rate is expected to be cut 20bp (10bp consensus). There is expected to be a €10bn monthly increase in purchase accounts and 12-month extension of the program to September 2017.

A ‘big bang’ announcement should allow the GBP to EUR conversion to retest that long-awaited 1.44 level in subsequent days after the event.

A disappointment could well ensure the rate goes sub-1.40 again.  

Ensure your currency provider has set up automatic purchase levels on either side of present rates to take advantage of any strong moves. Likewise, this will ensure you have a safety net should the euro tear away higher.